A $24,000.00 Raise? The Reality of the New Department of Labor Salary Requirements (if they go into Effect….)

So what was really going on? We have heard that the Department of Labor increased the salary for “executives”, meaning managers and a few others, from $23,660 to $47,892 annually. Proponents of the bill argued (correctly) that in 2016 nobody can raise a family on twenty-three grand a year, and that calling employees making that much money “executives” is ridiculous. Opponents argue that small businesses were now suddenly faced with the daunting prospect of doubling managerial pay to an astronomical level, putting them out of business or causing them to raise prices.

Both are wrong.

Political grandstanding is one thing; practical realities are another. Having litigated in this area for more than a decade, I can say with certainty that these positions misunderstand both the past and the future.

First, some background. The existing law is called the Fair Labor Standards Act or FLSA (which is codified at 29 U.S.C. 201). Under the FLSA, employees are placed in one of two categories, “exempt” and “non-exempt.” Exempt employees don’t have to be paid overtime, whereas non-exempt employees do. Our starting point is that everyone is non-exempt – entitled to overtime – unless their job falls into one of the myriad exemptions, all of which are highly complex. For the purpose of this article, we are going to ignore all of them but the “executive exemption.”

At its core, the executive exemption means that someone who supervises at least two other people, performs management duties, and is paid a salary of more than $23,660 is exempt, meaning they do not have to be paid overtime. This means that the manager in the office at the grocery store is probably exempt, whereas the guy stocking the shelves is likely not. Assuming that manager is paid that salary every week, the employer can work them as many hours as they want without paying them more – in theory up to 168 hours per week. If you want to work the stocking associate over 40 hours, however, you have to pay them time and a half.

As you might imagine, some employers have become enamored with the idea that they can work certain employees long hours without having to pay them any extra compensation. To accomplish this, in many retail establishments they will frequently designate one of several employees as a “manager” and just work them to death. This practice is especially prevalent in large chains of small retail stores and fast food establishments. When a salaried employee is working 60 hours per week, we can understand just how low that $23,660 per year figure is. At 60 hours per week it translates to $7.58 per hour, about a quarter above the Federal Minimum Wage.

Frequently, these employees aren’t even really managers. While they are often given some nominal authority over hourly employees in their store, as a practical matter they spend 95% of their time stocking shelves, flipping burgers, or working the cash register. But their status as managers allows them to work long hours for minimal pay.

So with that as the backdrop, here are the myths surrounding the new salary amount.

Myth 1: Workers will get a $24,232 dollar salary raise per year to $47,892. Hardly. First, most employees aren’t managers or otherwise exempt. With regard to actual managers, they will only get such a raise if their corporation doesn’t want to pay them overtime.

Corporations don’t just double anyone’s pay without a cost/benefit analysis. 95% of the time, that analysis will indicate that it will be far cheaper to pay these employees on an hourly basis, including overtime. For example, as discussed above, at $23,660 annually an employee working 60 hours per week is making $7.58 per hour. Paying an employee at time and a half — $11.37 per hour – for the 20 hours worked in excess of 40 would pay the employee $530.70 per week, $27,596.40 on an annual basis, a $4,000 per year raise. Obviously, a company is going to choose this option over a $47,892.00 salary.

Assuming that employers act rationally, the only employees who will getting a raise to the $47,892 figure will be ones who were close to it already.

Myth 2: This will damage small business. Likely not. The FLSA only covers employers who have more than $500,000.00 or more in gross annual receipts. The problem was never mom and pop businesses in the first place, it was small corporate storefronts and fast food chains.

Myth 3: This will result in more litigation. Perhaps, but not for employers who play by the rules. The safest way to avoid an overtime lawsuit is to pay overtime, and as noted above, the expense of this will not be nearly as significant as it has been made out to be.

Myth 4: Armageddon is upon us. Not likely, but you should be prepared. I don’t represent employers or do compliance work, but I know excellent, ethical attorneys who do. A small investment in advice now will protect you from Plaintiffs’ lawyers like me in the future.

Myth 5. The courts have thrown out the new regulations and they can be ignored. On November 22, 2016, the District Court for the Eastern District of Texas stayed the implementation of the new regulations. This stay is not yet permanent. Further, the opinion of one district court will likely not be definitive on this issue. A federal appeals court and likely the U.S. Supreme Court will be deciding this issue eventually – as they say, there is a lot of hockey left to be played. Of course, the incoming Trump administration may affect the regulations as well. One thing is for sure, if you haven’t explored compliance yet the ruling has bought you some more time to do so.

Ed Forman is a partner with the law firm of Marshall and Forman LLC in Columbus, Ohio. He represents individuals in a wide range of employment and civil rights issues, including wage and hour law.

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